Forecasting The Cattle Market For The Rest Of The Decade

Ranchers are facing two tough questions. First, will the 2012 drought continue into 2013? Second, what kind of calf prices can we expect for the next few years?

As of late March, USDA’s winter weather summary concluded that above-normal winter precipitation had provided some limited relief to drought-stressed rangeland, pastures and winter wheat on the Plains. Winter precipitation also had benefited the upper Midwest, but subsoil moisture shortages still persisted across the nation’s midsection. In contrast, drought was mostly eliminated before or during winter in the eastern Corn Belt.

By the time you read this, most ranchers will have a good idea about their own region’s spring moisture in 2013.

In response to the second question, I will share my long-run price forecast for the beef cow sector. The foundation for this is USDA’s 2013 baseline projections, which the agency prepares for the coming 10-year period; the latest figures were published in February 2013.

This month, I’ll share some of that information, and present my own price projections for the beef cow sector. Next month, I’ll use these price projections to project the lifetime economic value of a pregnancy-checked heifer entering a beef cowherd.

The beef industry is heavily impacted by the corn industry. Figure 1 presents USDA’s baseline forecast for crop (soybeans, wheat and corn); the blue line is the baseline projection for annual U.S. corn prices. In general, annual corn prices are projected to fall from the 2012 high through 2014. Barring another national drought, annual corn prices should be in the $4-$5/bu. range, and gradually increase the rest of the decade.

Figure 2 presents USDA’s baseline projections for red meat and poultry production. Beef production is projected to decline as a result of the 2011 and 2012 drought-induced drop in beef cow numbers. Due to fewer feeder cattle, 2013 and 2014 slaughter weights are expected to slowly increase.

Post-drought herds are projected to repopulate by the breeding of more heifers, which suggests even fewer feeder cattle will be available as ranchers build the national beef cowherd. Around 2016, USDA projects beef production to slowly increase into year 2021.

Figure 3 presents USDA’s baseline projections for annual slaughter steer prices. Projected slaughter prices for 2013 through 2015 are record-high. Prices are expected to dip slightly in 2016 through 2018, in response to the buildup of the national beef cowherd. The 2019-2021 prices are again projected to be at or near record levels.

I used USDA’s baseline price projections to develop a set of long-run economic projections for beef cowherds. The net effect of the 2011 and 2012 droughts was lower beef cow numbers; that, in turn, increased calf prices.

Figure 4 presents my planning prices for 500- to 600-lb. steer calves. The 2013-2016 period is projected to produce record-high calf prices. Beef cow numbers are expected to increase going into 2018, pushing calf prices somewhat lower through 2018, followed by a gradual increase in prices through 2021. In summary, steer calf prices are projected to strengthen in 2013, and remain at or near record high for the rest of the decade.

Economic costs of production are also projected to increase the rest of this decade (Figure 5). Year 2013’s costs of production are extra high due to the high price of hay for winter 2012-2013 beef cow rations. The 10-year trend line projection is +$13/year over this 10-year period, based on a projected 2.1% annual increase in production costs.

Record-high calf prices coupled with record-high production costs make for some interesting profit projections.

Figure 6 presents my long-run economic profit projections for beef cow producers. Year 2013 is negatively impacted by the 2012 drought. Years 2014-2016 are influenced by the reduction in the national beef cowherd. By 2016, the national herd is projected to expand, leading to a projected drop in the annual economic profits for the rest of the decade.

Economic costs of production are based on the full costs of all resources (except operator labor), with farm-raised feeds priced in at the local market price. Cash costs, on the other hand, are based on the out-of-pocket cost of the resources consumed; depreciation and opportunity cost of capital are excluded. Farm-raised feeds are priced in at cash costs of production.

The annual net cash flow of a high-equity herd is projected in Figure 7.

These numbers are after a $100/cow family-living draw has been taken out.

Net cash flow for a high-equity herd is projected to drop in 2013; again, this is due to the high price of hay for winter 2012-2013. I assume that some hay was purchased to get through the winter.

Net cash flow for 2014-2016 is projected to be record-high. After that, the projected expansion in the national beef cowherd will result in a lowering of annual net cash incomes.

All in all, barring any additional drought years, the post-drought economic forecast for beef cow producers is quite favorable.

Harlan Hughes is a North Dakota State University professor emeritus. Reach him at 701-238-9607 orharlan.hughes@gte.net.